Royal Caribbean Cruise Lines 2012 Annual Report Download - page 28

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PART I
TAXATION OF THE COMPANY
The following is a summary of our principal taxes,
exemptions and special regimes. In addition to or
instead of income taxation, virtually all jurisdictions
where our ships call impose some tax or fee, or both,
based on guest headcount, tonnage or some other
measure.
We are primarily foreign corporations engaged in the
owning and operating of passenger cruise ships in
international transportation. During 2012, we also
operated other businesses primarily consisting of the
land-tour operation in Alaska and the Pullmantur
land-tour and air business.
UNITED STATES INCOME TAXATION
The following is a discussion of the application of the
United States federal and state income tax laws to us
and is based on the current provisions of the United
States Internal Revenue Code, Treasury Department
regulations, administrative rulings, court decisions
and the relevant state tax laws, regulations, rulings
and court decisions of the states where we have busi-
ness operations. All of the foregoing is subject to
change, and any such change could affect the accu-
racy of this discussion.
Application of Section 883 of the
Internal Revenue Code
We and Celebrity Cruises, Inc. are engaged in a trade
or business in the United States, and many of our ship-
owning subsidiaries, depending upon the itineraries
of their ships, receive income from sources within the
United States. Additionally, our United Kingdom ton-
nage tax company, owned by us and Celebrity Cruises,
Inc., is a ship-operating company classified as a part-
nership for United States federal income tax purposes
that may earn United States source income. Under
Section 883 of the Internal Revenue Code, certain
foreign corporations are not subject to United States
federal income or branch profits tax on United States
source income derived from or incidental to the inter-
national operation of a ship or ships, including income
from the leasing of such ships.
A foreign corporation will qualify for the benefits of
Section 883 if, in relevant part: (1) the foreign country
in which the foreign corporation is organized grants
an equivalent exemption to corporations organized in
the United States; and (2) the stock of the corporation
(or the direct or indirect corporate parent thereof)
is “primarily and regularly traded on an established
securities market” in the United States or another
qualifying country such as Norway. In the opinion of
our United States tax counsel, Drinker Biddle & Reath
LLP, based on the representations and assumptions
set forth in that opinion, we, Celebrity Cruises Inc. and
our ship-owning subsidiaries qualify for the benefits
of Section 883 because we and each of those subsid-
iaries are incorporated in Liberia or Malta, which are
qualifying countries, and our common stock is primar-
ily and regularly traded on an established securities
market in the United States or Norway. If, in the future,
(1) Liberia or Malta no longer qualifies as an equivalent
exemption jurisdiction, and we do not reincorporate
in a jurisdiction that does qualify for the exemption,
or (2) we fail to qualify as a publicly traded corpora-
tion, we and all of our ship-owning or operating sub-
sidiaries that rely on Section 883 for tax exemption
on qualifying income would be subject to United
States federal income tax on their United States
source shipping income and income from activities
incidental thereto.
We believe that most of our income and the income
of our ship-owning subsidiaries is derived from or
incidental to the international operation of a ship or
ships and, therefore, is exempt from taxation under
Section 883. Additionally, income earned through a
partnership will qualify as income derived from or
incidental to the international operation of a ship or
ships to the same extent as the income would so
qualify if earned directly by the partners. Thus, we
believe that United States source income derived
from or incidental to the international operation of
a ship or ships earned by the United Kingdom ton-
nage tax company will qualify for exemption under
Section 883 to the same extent as if it were earned
directly by the owners of the United Kingdom ton-
nage tax company.
Regulations under Section 883 list activities that are
not considered by the Internal Revenue Service to
be incidental to the international operation of ships
including the sale of air and land transportation,
shore excursions and pre- and post-cruise tours. Our
income from these activities that is earned from
sources within the United States will be subject to
United States taxation.
Taxation in the Absence of an Exemption under
Section 883
If we, the operator of our vessels, Celebrity Cruises
Inc., or our ship-owning subsidiaries were to fail to
meet the requirements of Section 883 of the Internal
Revenue Code, or if the provision was repealed, then,
as explained below, such companies would be subject
to United States income taxation on a portion of their
income derived from or incidental to the international
operation of our ships.
Because we and Celebrity Cruises Inc. conduct a trade
or business in the United States, we and Celebrity
Cruises Inc. would be taxable at regular corporate
rates on our separate company taxable income (i.e.,
without regard to the income of our ship-owning